Importance of Business Plans to New Ventures Essay Example

A business plan is a strategic document written by entrepreneurs before establishing businesses. They can also be written at any stage in the life cycle of a business. It documents a step-by-step description of how an entrepreneur plans to run a business in the future. In most cases, the plan starts by listing or describing the resources and liabilities that the business or the entrepreneur has in possession. It is followed by a description of where the business or the entrepreneur is at the current stage and where he/she hopes to be in the future. After defining where the business needs to be in the future, the entrepreneur or the manager gives details regarding the actions that need to be taken in order to achieve the venture’s goals (Ontario Ministry of Finance 2001). This paper will look into the advantages of using a business plan. It will also investigate why a large number of entrepreneurs and managers choose to employ business plans. Moreover, the paper will seek to discover why some people find business plans unnecessary and choose to run their businesses without them.

A business plan is sometimes defined as the description of a firm’s future. The plan is usually comprehensive, and it tells or reminds entrepreneurs or managers about the actions and deadlines required for the achievement of the desired growth before a specified date. Business plans vary in size and complexity which is often induced by the size and complexity of businesses in question (Pinson 2005). Additionally, business plans can cover different length of time: they can be written for the short, medium, or long run according to the needs of the business venture. As a tool employed in running a business, such plans have received mixed reaction from various parties involved in business operation. Some managers and entrepreneurs consider them as must-haves for starting and running their businesses (McKeever 2012). Others view the whole idea as being overrated and may consider having substitutes to business plans or operating a business without a plan (Canada Business Network n.d.).

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Importance of Business Plan as a Strategic Document

Establishing a new business venture requires a very clear vision in addition to an innovation that seeks to bring a solution to the market (Aulet 2014). The vision has to be well-documented such that an entrepreneur does not deviate in the course of implementation. At the same time, an entrepreneur needs to have a standard to always evaluate the performance of the venture against his/her vision. This becomes one of the most crucial needs for a business plan. As a plan, it saves lots of time and resources in that an entrepreneur does not have to waste time deciding what needs to be done at each stage in the business operation. When an entrepreneur takes enough time to write a step-by-step plan of what the firm will be engaged in over a given period of time, he/she and the managers will know what to be done each day. In this sense, a business plan enables smooth running of a venture and saves time and resources.

One of the most crucial needs for a business plan in new ventures is that it assists entrepreneurs in seeking capital. Most of new ventures today begin only with an idea in the entrepreneur’s mind. He/she usually has no other factor of production at his/her disposal. Often, an entrepreneur may outline the idea in a format that can be operated as a business. Analysts argue that this is usually the innovation and not the product being offered to the market (Ashe-Edmunds n.d). When an entrepreneur has decided on the amount of factors of production needed to avail a product to the market, other people with these factors of production can join the venture. In most cases, an entrepreneur uses the business plan to convey the idea to the potential investors (Abrams 2003). The latter, in this case, invest the capital, which an entrepreneur employs to acquire other factors of production. Investors all over the world are known to accept and consider a business plan rather than any other document. In some cases, an entrepreneur is seen as being not serious if he/she is not able to produce a well-written business plan.

Another vital importance of a business plan is that it gives an insight to the level of know-how that an entrepreneur has to offer. This presents an opportunity for experienced entrepreneurs to provide crucial advice. Without such document, experienced entrepreneurs and other specialists may not be able to know areas in which an entrepreneur might be needing guidance. This is also true in the process of running a venture where potential sources of valuable advice may not know areas where their instructions might be needed. Writing of a business plan makes it possible for other specialists to advise an entrepreneur on how to run his/her new venture in a best way (Lockyer & Gordon 2005). This is also the case when an entrepreneur wishes to seek professional insight from specialists such as business lawyers or auditors among others. Such advisors ask for a professionally written document from which they can infer the best suggestions and recommendations to give. An entrepreneur trying to explain his/her business plan orally may simply appear as if offering his personal view and may not be taken seriously.

According to Ashe-Edmunds (n.d.), an entrepreneur may not be able to identify or foresee potential challenges in a venture. However, when he/she outlines the venture’s goals and step-by-step process of attaining them, issues can be put into a better perspective (Harvard Business School, 2011). As a result, threats and potential challenges become clearer. This is vital and enables the entrepreneur to prepare for such challenges in advance. Similarly, a business plan assists an entrepreneur in correcting any wrong suppositions made while developing the business concept. This offers an entrepreneur the earliest opportunity to fix the flaws. Such mistakes may include errors in the marketing budgets, misrepresentation of costs of obtaining raw materials, labour, the costs of permits, and other legal documents among others. Solving such issues early, before the firm has entered into any legal contracts or been registered by the authorities, may save the enterprise a large sum of money.

A business plan provides for an exit strategy. For any new entrepreneur, it becomes absolutely crucial to know when to stop. A business plan sets a realistic criterion for stopping when the venture is not as profitable as expected or when there are unbearable changes in the market. Without such plan, a new venture will continue operating even when profit margins are highly eroded or when no significant amount of profit is made. However, using criteria set in the business plan, an entrepreneur can learn when the venture is not profitable and either exit the market or diversify in order to avoid losses. According to Berry (2013), many entrepreneurs find themselves unable to run their venture well due to the absence of a business plan. It is common for new entrepreneurs to focus on the product or the market without minding other factors in a business environment.

The most ignored of such factors is the legal environment where one may start operation without one or several licences offered by the government or various agencies. Such entrepreneurs may also fail to pay taxes or use the wrong formulae in calculating them. The issues may become more complicated where start-up venture fails to incorporate or get identification numbers for the employees. All these issues are serious; an entrepreneur cannot evade penalties for claiming not to know. In most cases, when a new venture is found to have flouted the above legal requirements, hefty penalties and other forms of fines can be charged. In some instances, an entrepreneur may lose his venture altogether, which is not desirable. All these are issues that are effectively solved through proper drafting and writing of a business plan. In such cases, a business plan acts as a checklist for activities to be conducted and provides timelines at which each should be accomplished.

A business plan helps to highlight various interdependencies of different activities to be done in the life cycle of a young business. Production schedules relate with marketing schedules; however, this interdependency may not be easy to notice or adhere to without a business plan. When a business keeps a track of what should happen, the desired relationships between these activities become clear. For instance, a production schedule can be set such that the product release date matches or occurs just before the product testing date. Matching of these three schedules might be impossible without proper record keeping of all planed activities and schedules, which is achieved through drawing of a business plan.

A business plan is crucial in setting various timelines for activities. In most cases, start-up ventures, especially the ones without business plans, may not have the knowledge of what they are supposed to achieve over a given timeline. Such ventures cannot be able to evaluate their performance over time. A business plan assists new ventures and other firms in marking milestones achieved; this helps to keep the firm on the track. The business plan assists in keeping track of all timelines and deadlines in one document. This is crucial for a small firm run by one person or a large one run by a team or a number of teams.

In a new or existing venture, there may be problems determining who does what, especially if such activities are not defined in a written document. A business plan can assist an entrepreneur in delegating activities. This can be done smoothly where each activity is assigned to a particular person. In such case, the process of delegating activities becomes easy and runs smoothly. The business plan is the only document that can outline activities, timelines as well as people expected to execute such duties effectively.

Sometimes, an entrepreneur or a manager needs to evaluate strategies that work and those that fail. At the same time, he/she might want to estimate the performance of team members. When managing a team or tracking results of a course of actions, a business plan becomes a crucial aid in the whole process. A business plan achieves a lot, especially due to how plans and expectations are documented. This enables periodic corrections and rectification of unproductive action plans.

Due to the shortage of resources for most start-ups, an entrepreneur may lack enough financial support to periodically hire financial assistance. However, with a well-drafted business plan, an entrepreneur is in a better position to manage cash flow. This is because a business plan comes with a cash flow plan which can assist an entrepreneur in examining how the start-up is performing beyond checking only profit or loss. The cash flow plan integrated into a business plan will help an entrepreneur to check aspects such as costs and expenses, assets, sales as well as debts.

Due to the indicative nature of a business plan and the early warning signs it avails, it can assist an entrepreneur in reviewing the course of business to prevent the venture from failing or flopping. It enables an entrepreneur to be proactive and respond in time to the dangers that may ruin the venture. The nature of business plan enables an entrepreneur to prepare for things rather than simply wait for them to happen. The same document gives an entrepreneur an opportunity to closely track the outcomes of a course of actions in order to apply corrective measures in the right time. Although the business plan does not predict the future in any way, it allows an entrepreneur to quickly adapt to various events in the future establishing a framework in which these events are managed appropriately (Allen 2011). This enables most start-up ventures with proper business plans to survive within different time frames. Business plans are also utilized to strategically attract employees and align an existing firm with new business opportunities in the future; they assist a firm in dealing well with suppliers and win or retain business among other reasons.

Some Businesses May Begin without a Business Plan

Some experienced businessmen have expressed concerns over how some young entrepreneurs do not take responsibility for their work. There is no other way of achieving success in start-ups than investing hours of entrepreneur’s attention in implementation of sound plans and responding to early warning mechanisms (Samsom 2014). Failure to do this will lead to collapse of new as well as existing ventures. In other words, a business plan alone regardless of how well it has been drafted cannot make a business thrive. There is always a need for entrepreneurs and managers to follow their business plans with actions such that their businesses could be successful (Lockyer & Gordon 2005). Once a business becomes operational, it is crucial to plan and manage its financial performance appropriately. Creating a budget process is the most efficient way to keep a business and its finances on track.

For start-up ventures, the most important use of a business plan is in obtaining funding (Cooper & Vlaskovits 2013). Most ventures as shown above begin only with an innovation and without any other factor of production available apart from entrepreneurship. There is usually an argument that a business plan may not be required if an entrepreneur has enough resources to acquire all factors of production and begin operation (Cooper & Vlaskovits 2013). It is vital to note that start-up ventures can be established by entrepreneurs who have adequate funding. However, the importance of a business plan in such a case still remains as it can assist an entrepreneur in defining a budget in order to prioritize according to the importance of each activity. A business plan, in this case, would aid such an entrepreneur to manage his/her finances well.

A business concept paper is viewed by some as a possible replacement for a business plan. In various new ventures, a concept paper often describes how an entrepreneur’s idea or invention can be made into a marketable product, and the whole process is seen as an innovation. In such cases, it can be argued that a business plan has no importance as a concept paper vividly describing how an invention will be made into a marketable solution for the consumers. In some cases, a business concept paper can even focus on the gap that an entrepreneur saw in the market and worked to bridge it. However, with all the importance of a concept paper, it is not comprehensive enough to replace a business plan. A concept paper lacks many aspects that are found in a business plan. It does not cover the legal, marketing, and management aspects of a business. It only concentrates on product and ignores all other aspects. For instance, it does not guide an entrepreneur on the licences and other legal procedures that might be required. At the same time, it does not cover the marketing part. A concept paper would only be successful for a product or a market structure that favours production-oriented and not the market-oriented marketing. Due to all the reasons discussed in this paragraph, a concept paper can only be used to enrich a business plan and not to replace it.

The general assumption that a business plan is only crucial for new ventures or inexperienced entrepreneurs is not true. Even though these groups benefit more from a well-drafted business plan, any other business needs a plan. Both experienced and inexperienced entrepreneurs need to arrange their ventures well. They need to understand where the business is at the current stage and where it needs to be after a specified period of time. They also need to outline completely their courses of actions with timelines, which cannot be achieved through any other document. No experience can make an entrepreneur or a manager able to successfully run a new venture without a well-written plan. For this reason, a business plan remains a crucial document for successful running of new as well as existing ventures.

Evidence Supporting the Importance of Business Plans to Start-Ups

According to the Department for Environment, Food & Rural Affairs in the UK (2012), a business plan is very fundamental in running businesses. The department has found the use of a business plan to be absolutely crucial in helping people to establish businesses. At the same time, a business plan has also been discovered to be useful in assisting new as well as existing ventures in rectifying issues that may lead to collapse of such businesses. This agency found the use of business plans to be absolutely vital for management of accounts, benchmarking, and general running of businesses. In addition, it identified that the plans were necessary for revolutionising farming business in order to increase profitability. For this reason, the department undertook to train rural business people as well as farmers on how to draft a good business plan. The department also assisted farmers in getting specialists that would aid and train them in areas concerning the use of business plans.

This department indicated that proper planning through a business plan was essential to manage a myriad of changes that occur in a business environment. Such changes may be drastic, and they may require an entrepreneur or a manager to diversify and start a completely new business which will need a business plan. This department also encourages farmers and other business people to get business plans so that they can receive funding for starting new ventures or implementing diversification. This is a great evidence that business plans are crucial in successful running of new ventures.

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Start Up Loans Company, which was established and is being funded by the UK government to nurture entrepreneurs, lists a business plan as one of the core requirements for an enterprise to qualify for such funding. In the event that a young entrepreneur is not in a position to generate a good business plan, this company assigns such people mentors so that they are able to draft and effectively utilize a business plan (Bravo 2012). This shows the importance that is associated with a business plan. The same requirement is asked by banks and other financial institutions in order for an enterprise to qualify for loans for start-ups.

According to Zwilling (2013), business plans will always be relevant. He said this in response to the story “Real Entrepreneurs Don’t Write Business Plans” that was published in New York Times magazine. The article in the New York Times talked more about how many entrepreneurs took a lot of time to prepare business plans until the viability of some ideas expired. The article also explained that some entrepreneurs concentrated on detailing their business plan until the idea became vague and therefore less useful. The only reason why an entrepreneur should skip a business plan is if he/she has it well-outlined in the mind and is experienced enough to factor in all aspects. The concern could be the rate at which entrepreneurs process their ideas to devise a business plan. Entrepreneurs should be very fast refining new and viable ideas and should process them into a business plan in the shortest time possible (Cohan 2012).

Zwilling (2013), who is a professor, an entrepreneur, and an author, faulted the statement that much of business success can be achieved, especially for new ventures, without proper planning, documentation of such plans as well as proper and appropriate use of business plans. William B Gartner, who is a professor in Clemson University, commenting on various researches conducted in the university concerning entrepreneur dynamics, concluded that businesses started and run using a business plan had a higher rate of success than the ones that did not employ such a plan. Preparation and use of a business plan increased the chances of success of start-ups by 250 percent over those who did not prepare or use a business plan (Henricks 2008).

Evidence against Business Plans

Many researchers have sought to discover whether it is really worthy for entrepreneurs to invest their time and money in developing a business plan (Filion 2007). This study has been done by researches, entrepreneurs, and universities. One researcher who engaged in it was William Bygrave, a professor emeritus. He worked in Babson College and conducted his research in 2006. He had also conducted several other research works in the field of entrepreneurship. His work involved comparing graduates from Babson College. His comparison involved net worth of businesses that were established using business plans with those that were started without using them. His research did not really determine which group did better (Henricks 2008).

However, according to Gartner, his research missed several points: he did not include the number of businesses that had failed on both sides. Additionally, it only involved the net worth and did not indicate the number of businesses on each side. The question, in this case, should not be about who wins or loses between those who use business plans and those who do not. The better question would have been which of the two avenues offers a higher opportunity for success of a start-up. It should also compare which one of the two avenues provides the entrepreneurs with the best access to capital given that more than 80% of start-ups may need to begin on borrowed funding. A business plan increases the chances of a start-up to get funded and also receive other forms of assistance (Libecap 2007)

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Gartner chose to consider the more comprehensive research done by the Panel Study of Entrepreneurial Dynamics; it shows a different picture. This research involved around eight hundred people and covered a large geographical area offering more generalised results. The study concluded that writing a business plan was absolutely crucial for a success of start-ups. It did not only help new ventures to succeed but made it possible to establish a large percentage of new ventures as it put the entrepreneurs behind them in a much better position to get funding. Gartner stated that many people have come and claimed that business plans were not really necessary, but there is no single research that has supported their claims.

Gartner further added that a business plan showed willingness and commitment of an entrepreneur. According to him, people who take time to prepare a formal business plan are more committed to succeeding and are likely to do more to make their business thrive. The fact that these people can do more means that they can also achieve more. Consequently, they will often research more concerning the markets, sources of financing, and legal political environments and will also take their time to make careful projections. The evidences mentioned above prove that there are people who support the use of business plans while others do not. Those who support the use of business plans have facts and research conclusions while those being against do not. The fact that someone started a business without a business plan and succeeded cannot suffice to conclude that business plans are unnecessary. There are also many people who use business plans and fail. The success or failure of a business depends on many factors.

Evidences that support the use of a business plan are more rigorous and represent organizations that can be trusted. One of such organization is the Department for Environment, Food & Rural Affairs in the UK. This is a department that has successfully revolutionised agriculture and small holder business in the UK for many years. The department has found it useful to teach small enterprise holders and farmers how to employ a business plan. Another organization that has supported the use of a business plan by the new ventures is the Panel Study of Entrepreneurial Dynamics which also took time to conduct a widespread research that proved the importance of a business plan. This argument has also been supported by many entrepreneurs, and professor Gartner is among them. This suggests that it is vital to use a business plan.

On the other hand, professor emeritus and one entrepreneur suggest that a business plan is not important. Bygrave, on his side, claimed that there was no evidence to support the proposition that a business plan aided a business to succeed. His research cannot be regarded conclusive as it does not confirm that business plans are actually unnecessary. Additionally, the article “Real Entrepreneurs Don’t Write Business Plans” that appeared in the business week and the NY Times gives the writer’s opinion based on some entrepreneurs who succeeded in some ventures without writing a business plan. The two stories do not mention the many who failed trying the same (Holmquist & Wiklund 2010). At the same time, they do not give a research conclusion that supports this proposition. It is also important to note that these entrepreneurs are the experienced ones who can organize their opinions into a plan even without documenting it through witting. Similarly, it is worth mentioning that some businesses can thrive without a business plan as the latter only increases the chances of success of a business in a great way.
The parties that suggest that a business plan is not important are less rigorous and miss key facts. At the same time, they lack enough facts and do not offer a possible replacement for a business plan. For instance, a business plan is sometimes written so that an entrepreneur can secure funding. Those in favour of a business plan regard it as absolutely crucial in enabling the establishment of many new ventures. Those against the use of a business plan do not give an alternative document that can be used by the potential entrepreneurs to get funding.

Conclusion

In conclusion, a business plan is very important for new ventures as it helps to clarify the vision of an entrepreneur. Additionally, it acts as a checklist and reminds an entrepreneur what needs to be done at every stage. At the same time, it makes it easy for an entrepreneur to monitor the progress of the new venture making him/her able to take timely affirmative action. There are instances in which establishment of a new venture can be practically impossible without a business plan. This happens when an entrepreneur has no initial capital. In such cases, a business plan becomes essential for seeking financing from various individuals, government agencies, or financial institution. A business plan assists in starting as well as smooth running of new ventures.

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